Analysis by Austin Hughes, Chief Economist, KBC Bank Ireland

• Annual rate of property price growth picks up to 12.5% in January 2018, the fastest rate since May 2015

• Recent acceleration owes as much to strong economy as to inadequate supply

• Strong jobs data likely to continue to underpin Irish property prices

A monthly rise of 0.9% in Irish residential property prices in January was sufficient to push the annual rate of increase to 12.5%, up from 12.2% in December to the fastest pace of growth since May 2015. Momentum in Irish property prices is extremely strong and even if there were no further increases in the remaining months of the year, the average property price in 2018 would be 6.7% % above that in 2017.

While a shortfall in supply is central to the upward pressure on prices, arguably the key driver of late is the pace of improvement in the Irish economy. As diagram 1 below indicates, the turn in the Irish jobs market is still running somewhat ahead of the pick-up in property prices and the current strength of the trend in employment should underpin Irish property prices for some time to come.  

As prospective purchasers feel more confident in relation to job security and future income growth, pent-up demand for home purchase that has built up steadily is increasingly emerging and, in the face of limited increases in supply is translating into higher housing prices.

A basic regression analysis (details available from Austin.hughes@kbc.ie) relating the trend in employment to that in housing prices suggests that each percentage point increase in numbers at work is associated with a roughly two and a half percentage point increase in (inflation-adjusted) house prices.

With numbers at work in the Irish economy expected to grow by about 3% this year, this relationship would imply that nominal house prices could increase by about 9% this year.